Why does it cost more for water damage repair than the cost of the phone?

Where did you get that impression? Water damage repair is typically a service replacement fee, which is less than the retail price. For example, that would $319 in the US for an iPhone 7, which retailed for $699 when new and about $449 before it was discontinued. That doesn't include the possibility of higher storage capacity, where the repair fee is generally the same.

The cost of repair or out of warranty replacement has nothing to do with whatever you paid for your subsidized phone. Those are two unrelated prices.

Apple’s service prices are fixed for each model - iPhone Repair - Official Apple Support. The out of warranty replacement cost for an iPhone 6 is $329. Are you dealing directly with Apple for the replacement? Or are you dealing with someone else - your carrier, or an insurance company or an Authorized service provider?

It would appear you received your phone at a subsidized price.

Initial Price US $$649 (16 GB) $749 (64 GB) $849 (128 GB)